Stephen Foley: Politicians concerned with elections, not jobs
Saturday 09 July 2011
US Outlook: If US politics hadn't gone through the looking glass, its political leaders would have responded to yesterday's shocking jobs report with a promise to stimulate a clearly faltering economic recovery. Instead, tomorrow, they will head into negotiations on a massive programme of fiscal contraction.
The best that can be hoped for from the debt deal under discussion is that the Obama administration can limit the immediate harm to the economy.
Government spending cuts will exacerbate public sector job losses at a time when the private sector is barely picking up the slack. The only plan for an offsetting stimulus, first mooted by ex-White House adviser Larry Summers, is to give workers and employers a holiday from social security taxes. It is not certain that even this meagre measure will be included, but it should be.
The bleak outlook has been improved somewhat over the course of this week, because it seems that the talks have expanded from the short-term, stop-gap measures that first looked likely. Instead of $2 trillion (£1.2trn) of front-end loaded cuts, now there is the possibility of a much longer-term deficit reduction deal. The latest suggestion is that there could be a $4trn deal, one that includes some measure of tax increases (or at least the elimination of tax breaks for previously favoured industries, such as ethanol production and oil and gas), plus reforms to social security and government healthcare for the elderly.
The bigger and the longer term the overall deal, the more scope there is to ditch short-term measures that will contract the economy now, and make up the numbers with bigger cuts to entitlements later in the decade, and with a revamp of the tax code that could eventually bring in more revenues.
So, participants now have an expanded list of potential deficit reduction measures, costed and sorted into three categories: spending cuts, tax break eliminations and tax rises.
Over the coming weeks, they will pick a few from each of the categories (or at least the first two), according to the political balance of power in Congress and calculations about next year's elections.
If they could also consider jobs and the economy, that would be jolly nice of them.
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